Prices at tea auctions crash in meltdown

If the trend of a 53 per cent price decline is maintained for the next few months, some rural economies are bound to collapse.

That is before taking into account the fact that production is down on last year. With the dollar constantly threatening to breach the Sh80 exchange barrier, the tea industry decline augurs badly for importers who have to factor in a weak shilling.

KTDA is understood to be frantically seeking the intervention of the TBK. The small-scale farmer agency runs dozens of factories, which constitute much of the country’s rural industrialisation. It markets over 60 per cent of Kenyan tea.

The pain is not confined to Nairobi, and it will be felt in Blantyre, Malawi and Colombo in Sri Lanka in equal measures.

Mombasa Tea Auction is the second largest after Colombo serving the Great Lakes region, Malawi, Zambia, Madagascar, Zimbabwe and Mozambique.

This means a multinational intervention, perhaps incorporating donors, may be required. Kenya is the largest supplier at the institution that has grown in global importance after the London tea auctioned collapsed in 1998.

For tea brokers, the dwindling commissions come as the Dubai Tea Trading Centre threatens to eat into their shrinking pie. KTDA sells 75 per cent of its tea at Mombasa, 15 per cent directly, seven per cent through Ketepa and the balance at the factories.

The tea crisis has been brewing as Kenya and new growers like Vietnam increased production to prick the price bubble in August. Last year Kenya produced 369 million kilos of processed tea worth Sh43 billion.

In 2008, the country is expected to produce a lower 335 million kilos due to drought. But well before that Pakistan, which takes the largest chunk of 28 per cent, has bought smaller volumes after it went into a free trade arrangement with Sri Lanka under the South Asian Association for Regional Cooperation (SAARC).

Pakistan is followed by the UK and Egypt; all buyer countries’ currencies have slipped against the dollar and their economies indicate lower growth.

Attempts to have Kenya get into a similar free trade arrangement have been scuttled by Tanzania, which despite producing only a small amount of rice lives in fear of Pakistani rice imports.

Sri Lanka has acted quickly by buying 20 per cent of the tea at their auction and provided credit to buyers to stem cash flow problems at the factory level.

President Mahinda Rajapaksa convened a stakeholders’ meeting after the prices declined precipitously. But the slump was not entirely unexpected. Food and Agriculture Organisation economists have been warning the $2.15 a kilo price was not sustainable and suggested only prices under $2 were.

“As a short-term solution we are advising cultivators to pluck only the good leaves and for factories to manufacture only good grades of tea,” Tea Board chairman Lalith Hettiarachchi said a month ago.

KTDA has been trying to enhance this rule with a huge furore triggered by insistence on plucking two leaves and a bud.